Rupee, stocks point to economy in crisis, FM blames 2008 splurging

Carnage tightened its grip on Indian markets on Tuesday, with the rupee hitting a new nadir of 66.30 to a dollar and the Sensex tanking by 590 points to its lowest point this year.

The reasons this time: Fears that the food security bill would worsen a ballooning fiscal deficit, and that war would break out in the oil-rich Middle East.

While the rupee and the stock market were puncturing the prospects of Indian importers and investors, the price of gold soared to an all-time high of Rs. 32,585 per 10 grams, up Rs. 820, putting the common man's traditional store of wealth further out of reach. Silver rose for the third day running, gaining Rs. 800 to Rs. 54,800 per kg.

The man tasked with steering the Indian economy through its latest crisis, finance minister P Chidambaram, told Parliament that more reforms were the answer. He listed out ten steps including promoting of manufacturing sector and exports to boost faltering growth, which needs to be raised to its potential rate of 8%. And he hinted at the possibility of a sovereign bond to bring in more dollars.

“All options are on the table. No option is ruled out. Which option we should exercise is a matter of judgement,” he said.

"When I took over on August 1 (2012), I knew that I was returning to a very difficult pitch," Finance Minister P Chidambaram said on Tuesday braving the opposition attack over the bad state of economy reflected by declining value of rupee and rising food prices.

During a debate on the economic situation in the Lok Sabha, he attributed much of the current economic woes to the stimulus provided to help the industry to tide over the problems emanating from the global financial meltdown of 2008.

POLL: Will the passage of food bill put more pressure on rupee?

President Pranab Mukherjee was the Finance Minister when the stimulus was provided to the industry. Chidambaram succeeded him as Finance Minister in August 2012.

Recalling his return, Chidambaram said, "Fiscal deficit limits had been breached. The CAD had swelled. These were the two main challenges, apart from the number of other challenges that we had to face." After that he claimed that situation had improved till the unexpected development on May 22, 2013, when the US Federal Reserve announced tapering of bond purchases which sent the emerging markets in a tizzy.

"In the last 12 months there have been days when I have been more upbeat; days when I been more downcast. But the fact is some stability did return to the economy until a completely unexpectedly unexpected event took place on May 22, 2013", he said.

He attributed tumbling of rupee to that announcement of Federal Reserve.

India’s economy grew by 5% in 2012-13, the worst in a decade. The prospect of a credit rating downgrade to "junk" casts a very long shadow over the market.

News that investments worth more than Rs 1.83 lakh crore had been approved did nothing to boost sentiment. Before Chidambaram spoke in the House, the 30-share Sensex had ended deep in the red, down 3.2% or 590 points at 17,968, while the broader Nifty benchmark fell 3.45% to 5,287, a bloodbath in which bank shares were among worst hit. Investors lost around Rs. 1.69 lakh crore.

The rupee fell by 194 paise or 2.9% to 66.30, before recovering slightly to close at 66.25, compared to Monday’s close of 64.30. It has fallen by 17% in 2013 so far. The benchmark 10-year government bond -- an indicator of interest rates – spiked 0.44 percentage points to 8.78%.

“We believe, crude oil has emerged as a key risk in the near-term, which is not a good sign for the rupee,” says Sanjeev Zarbade, vice-president, research, at Kotak Securities. The lifeblood of Indian industry is diesel, which will need heavier subsidies if crude prices rise.

The imminent scale-back of an easy loan policy in the United States is the biggest factor hurting emerging market currencies. But Indian investors suffered another blow: The government, already burdened by fuel subsidies, is readying itself to take on an annual Rs 1,30,000-crore hit on account of guaranteeing cheap foodgrains to the poor. This is on top of a widening of the current account deficit (CAD) in foreign exchange transactions.

Other measures among the 10 outlined by Chidambaram included reviving investments, containing fiscal and current account deficits, raising capital expenditure of state-owned firms and recapitalising government banks.

“If we are patient, firm and clear headed and once we take these steps, the economy will begin to turn and we will be able to build a strong economy," he said.